ECB's Draghi faces heat over euro, Monte Paschi

February 06, 2013|Reuters

* Reuters poll points to rates on hold until mid-2014

* Euro strength in focus as Hollande calls for FX policy

* Draghi to face grilling over Monte Paschi scandal

By Paul Carrel

FRANKFURT, Feb 7 (Reuters) - Mario Draghi faces a grillingover the European Central Bank's sensitivity to the euro's sharprise and his connection to an Italian banking scandal onThursday, at a monthly meeting when the ECB is almost certain tohold interest rates unchanged.

Investors will seek to gauge how much further the euro mustrise before its strength forces the ECB to express concern, oreven reverse course and contemplate a rate cut - a scenario thatshows next-to-no sign of materialising on Thursday.

The euro has appreciated to a 14-month peak againstthe dollar this year, though it slipped on Wednesday, withtraders becoming cautious in the event that Draghi expressesconcern about the currency's strength.

The ECB's policymakers meet after French President FrancoisHollande said on Tuesday the euro zone must develop an exchangerate policy to protect the currency from "irrational movements".

Erkki Liikanen, an ECB Governing Council member, laterdismissed any prospect of the bank pursuing such a policy,saying "we have no foreign exchange target" - a line ECB chiefDraghi is likely to take at his 1330 GMT news conference.

"The market will want to hear stronger words on the foreignexchange front to stop the upwards trend that's in place but wedoubt this will happen," said Nomura economist Nick Matthews.

"I think he will focus more the comments around the exchangerate on the G20."

At his news conference last month, Draghi read out a G20statement on exchange rates. The G20 group of economic powersholds a mid-February meeting and France said on Wednesday itwould raise concerns about the euro's strength then and at talksamong euro zone finance ministers next Monday.

BANK SCANDAL

At Thursday's news conference, Draghi can also expect to beasked how much he knew about the derivatives scandal at Siena'sMonte Paschi bank, and what he did about it when heheaded Italy's central bank from 2006 to 2011.

Italy's third largest bank has been at the centre of afinancial and political storm as a result of facing losses ofabout 1 billion euros from a series of derivatives andstructured finance trades.

Draghi's news conference offers reporters their first chanceto quiz him directly on the Monte Paschi scandal since his rolecame into focus late last month.

Draghi faced criticism then after former Italian economyminister Giulio Tremonti said it was "stupefying" that in hisrole as supervisor of Italy's banking system Draghi failed todiscover or prevent loss-making derivatives trades at the bank.

Monetary policy should prove easier for Draghi to handle.

None of the 75 economists surveyed in a Reuters poll lastweek forecast a cut in rates from their record low of 0.75percent on Thursday. The poll suggested the ECB would not changeits rates until at least July 2014.

A batch of indicators cited by Draghi at his Jan. 10 newsconference show the economic distortions of the euro zone debtcrisis are starting to correct themselves, with the data flowpositive over the last month.

One of the indicators shows the ECB's balance sheetshrinking after banks jumped at the chance late last month torepay early 137 billion euros in long-term loans they took fromthe central bank.

This market-driven unwinding of ECB crisis funding measuresis in stark contrast to the expansionary policies being pursuedin the United States and Japan.